Chapter 5 Chapter 5 National and

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Chapter 5 Chapter 5 National and Powered By Docstoc
					Chapter 5: National and International Accounts

Goals: Understanding how to measure macroeconomic
activity in an open economy.

In a closed economy we have three equivalent measurements for
macroeconomic activity.

  (I)     Gross national expenditure (GNE) = personal
          consumption (C) + investment (I) + Government
          spending (G). GNE is an expenditure measure.

  (II)    Gross domestic product (GDP) = value of all
          intermediate and final goods and services produced
          within a country’s territorial borders, minus the values
          of all goods and services purchased as inputs. GDP is
          an output measure.

  (III)   Gross national income (GNI) = total income resources
          of the economy. GNI is an income measure.

In closed economy GNE = GDP because the nation’s
expenditure must be spent on the final goods and services it
produces; GDP = GNI because GDP measures the value of firm
outputs minus the cost of firm inputs, and the remaining flow is
paid by firms as income to factors, such as the owners of labor,
capital and land employed by firms.

In an open economy those three measures are not necessarily

In an open economy, because of trade in goods and services, not
all of the GNE payments go to GDP, and not all of GDP
payments arise from GNE.

GDP = GNE + Export (EX) – Import (IM)

Trade Balance (TB) by definition equals EX minus IM

In an open economy, because of trade in factor services (FS),
not all of the GDP incomes go to GNI, and not all of GNI
incomes arise from GDP.

Denote the income from overseas by EXFS, and the income
going overseas by IMFS

EXFS - IMFS is called net factor income from abroad (NFIA).


Exercise: GNI = GNE + ___________________

In the past GNI was called GNP, or gross national product.

Read the application on page 165 to see sometimes GNI is a
better measurement than GDP of economic performance.

Many international transactions, such as foreign air and income
remittance, take place outside of markets.

Gross national disposable income (GNDI) = GNI + NUT

where NUT denotes the net unilateral transfers. For countries
receiving big foreign aid, NUT can be substantial.

The current account (CA) by definition = TB + NFIA + NUT.


Note we use letter Y as shorthand for GNDI.

GNDI is full income measure.
GNE measures payments by home entities.
CA measures net payments to home arising from the full range
of international transactions and transfers.

CA can tell us whether a nation is spending more or less than its
income. To see this, we start with the open-economy national
income identity, which is in effect the definition for GNDI:

Y = C + I + G + CA       (5-5)

if CA > 0, Y _________ C + I + G

if CA < 0, Y _________ C + I + G

National income is greater than expenditure if and only if CA is
positive, or in surplus.
National income is less than expenditure if and only if CA is
negative, or in deficit.

Subtracting C + G from both sides of (5-5), and defining the
national saving as S = Y – G – I, then we end up with the current
account identity:

S = I + CA (5-6)
CA > 0 if S______I

CA < 0 if S______I

(5-6) tells us that to reduce a current account deficit, a country
must increase its national saving or reduce domestic investment.

Discuss how higher US barriers to imports from China would
affect its national saving, domestic investment, and current
account deficit. If restriction on imports from China does not
work, how to reduce US current account deficit?

Note: National saving = personal saving (Sp = Y– T - C) +
public saving (Sg =T - G) where T denotes taxes.

We can rewrite (5-6) as

CA = Sp + Sg – I (5-10)

Using (5-10) discuss whether a fiscal deficit (negative Sg) must
cause a current account deficit.

5-3 The balance of payments (BOP)

BOP provides a detailed picture of the composition and
financing of the current account. All transaction between a
country and the rest of world are recorded in BOP accounts.

The financial account (FA) records transactions that involve
financial assets. The total value of the financial assets that are
received by the rest of world (ROW) from the home country is
the home country’s export of assets, denoted by EXA. The total
value of financial assets that are received by the home country
from ROW is the home country’s import of assets (IMA)


The capital account (KA) records the acquisition and disposal of
nonfinancial and nonproduced assets, and capital transfers. For
US, KA is negligible.
Assets issued by home entities are home assets; assets issued by
foreign entities are foreign assets.

When a home country holds a foreign asset, it is called external
asset because it represents an obligation owed to the home
country by ROW.

Conversely, from home country’s perspective, a home asset is a
claim on the home country. When a foreign entity holds such an
asset, it is called external liability, because it represents an
obligation owed by the home country to ROW.

GNE + CA + FA + KA = GNE

where GNE + CA represents resources available to home
country due to income, and FA + KA represents resources
available to home country due to trade in assets.

We can cancel GNE from both sides, and end up with the
balance of payments identity:

CA + FA + KA = 0 (5-12)

(5-12) implies that any current account deficit must be matched
by an equal surplus in the other two accounts.

You need to refer to double-entry bookkeeping in accounting
class to fully understand (5-12).
See side bar on page 182 for examples of double-entry


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